How To Curb Flow Of Black Money Into Real Estate

It is an open secret that a significant part of transactions in India's real estate sector takes place in the so-called black money. There is a general agreement that this needs to be checked and greater accountability and transparency need to be brought into the markets. But it is impossible to stop such transactions without knowing their root cause. In many cases, people engage in such transactions because:

1) Many otherwise legitimate activities are banned by the law.

2) The cost of abiding by the law is too high. This is especially true of buying and selling real estate assets in India.

As Indians invest more money in real estate than in other asset classes like gold and securities, unaccounted transactions in the sector come across as a major cause for concern. For this reason, a law-abiding citizen often thinks twice before buying or selling real estate assets. Cricketer Sachin Tendulkar, for example, did not buy a house for long because no seller was willing to not understate the value of the property.

Urban planning experts often point out that Indian real estate regulations are paradoxical. For instance, in developed countries, property tax is much higher than in India, but stamp duty is much lower. In India, it is the other way around.

It varies from state to state, but stamp duty in India in general is very high. So, people undervalue their properties to lower their stamp duty payout. While lower stamp duty may be of some help, it will not eliminate the problem of unaccounted money completely. This is because there also are other regulations that compel people to undervalue their property. Capital gains tax is one. Even if the government eliminates stamp duty, the seller has a strong incentive to accept unaccounted money from the buyer because capital gains tax is quite high.

When Manmohan Singh was India's finance minister in the early 1990s, he tackled smuggling by eliminating Customs duties. He was able to do this because when the high cost of engaging in such activities declined, people could go about their business without breaking the law. India's growth rate went up tremendously when the government abolished the Customs duty in phases. If the government abolishes or even lowers stamp duty, the results will be similar, and the real estate markets will perform much better.